By Thinktank
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Western Asset: The key to an improved tone and more stability in fixed-income markets is a moderation in inflation. We discuss factors that point to the easing of global inflation pressures.
The debate rages on over what’s driving inflation and where it may be headed across a number of key geographic regions. As Western Asset’s Chief Investment Officer, Ken Leech, notes in his latest Market Commentary, “One of the acute challenges in the [US] inflation debate is whether to look at forward indicators of inflation, which are slowing sharply, or the more notable Consumer Price Index (CPI) and Personal Consumption Expenditures (PCE) inflation measures, which tend to be lagging indicators.” The following illustration depicts a number of forward-looking indicators that have come out in recent weeks and which support a lower inflation outlook. Despite clear evidence that this may well be the case, rate markets have repriced aggressively with yields spiking on fears that the Federal Reserve (Fed) will continue tightening to contain inflation pressures. Hawkish rhetoric from Fed Chair Jerome Powell and a number of Federal Open Market Committee members before and after last month’s Jackson Hole symposium—reiterating that inflation remains unacceptably high—has only poured more fuel on US rate volatility and fanned the flames of fear for an imminent (self-engineered) recession. This has caused spreads to widen across all risk assets.